Edward Jones continues to stay at the top of the customer and financial advisor satisfaction charts. But with Wachovia's plans to consolidate its brokerage business...

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Edward Jones continues to stay at the top of the customer and financial advisor satisfaction charts. But with Wachovia’s plans to consolidate its brokerage business in Edward Jones’ hometown of St. Louis, the broker-dealer is facing more pressure than ever to differentiate itself.

Q. What’s your latest number of financial advisors?There’s great news for our firm. We started this year with 10,288 financial advisors in our U.S., Canadian and U.K. operations.

In 2006, we ended the year up 550. It was a decent year for us. It was not as much growth as we had hoped, but it was a good restart to our growth engine.

In 2007, through the end of September, we have a net increase of 631 financial advisors, already surpassing what we did in all of 2006. We’ve grown from 10,288 to 10,919. We should end the year comfortably in excess of 11,000, with 11,100-11,200 advisors.

Q. How about attrition?We’re running at about 10.9 percent advisor attrition. We are not satisfied with that and are constantly trying to improve that. But it’s down from over 11 percent last year and higher the year before last.

We’ve always grown organically. We don’t buy brokers or try and steal them from other firms. We will occasionally hire people from other firms. In general, we hire people who have done very well in other professions such as accountants, teachers and engineers.

You are going to have higher attrition with your brand new people, and we have a significant part of our organization that is relatively new. Adding everything together … 10.9 percent [attrition] is pretty good.

Q. How is Edward Jones planning to grow?Other firms have grown traditionally by consolidation, acquisitions or mergers. Wachovia’s been very good at it, acquiring firms like Wheat First and Interstate/Johnson Lane. Obviously, the acquisition just voted on by A.G. Edwards is another one.

Edward Jones is a private firm; we’re not public. We have no ownership outside of the men and women who have worked or retired from our firm. That gives us a strategic advantage. We have a very strong culture and set of values that we are very protective of.

When you merge or acquire, you’re going to get some dilution to your culture with a little bit of theirs and a little bit of ours. And you end up being something in the middle. We’re not willing to do that.

We have a strategically advantageous business model. We have a strong culture that starts with the fact that we’re a partnership and are able to make long-term decisions. We don’t have that 90-day reporting cycle that requires us to report ever-increasing earnings and dividends to our shareholders. It isn’t a part of our management or decision-making process.

We can grow organically, because we are patient. We view our training not as an expense, but as an investment in the productive asset of the firm – the financial advisor. We have a proven ability to train advisors and grow the business.

I was the 200th broker at the firm back in 1977. Think about that, from 277 to 10,900 today. That’s 13 percent a year. It’s the way we’ve chosen to grow and it’s proven that we can grow very effectively. It works for us.

Q. What’s your view on Wachovia making St. Louis its headquarters?I’m glad that Wachovia is going to locate its brokerage division in St. Louis. It preserves some of the jobs, though they have begun announcing layoffs. But that is better than if the whole operation had been shipped off to Richmond.

This is an opportunity specifically for Edward Jones to pick up some clients and some resources perhaps from the [former A.G. Edwards] head office. We have hired some of the A.G. Edwards producers, but not by offering the front money as some other firms are doing.

Q. What is the firm doing with respect to technology?We are in the technology business; it facilitates everything that we do. We are in the process of investing $250 million into our communications system. We have just successfully transitioned from the old satellite-based information system to what we call our global branch network with a terrestrial, T1 line. It’s much faster and more reliable so that we can put out additional functionality to our branches.

Q. How about new products? We have been and continue to be primarily transaction-based in our business model. We have traditionally avoided the wrap-account business and will continue to avoid this business with its fees in lieu of commission.

But, after having looked at what the rest of the industry has done in the past few years, what we will be coming out with in the first half of 2008 is a mutual fund based fee-advisory account. It will be an advisory account, so advisors will have to have Series 7 as well as Series 63 and 66.

This will be an account with an annual fee, and for the fee there will be an enhanced level of performance reporting. You’ll have an account that is periodically and regularly rebalanced, depending on the portfolio, with at least annual reviews required. And it will be very attractively designed and priced. It’s time for us to offer this to our clients, and it will be a growing part of the business.

Q. How about your incomes, sales and profit sharing in ’07?We’ve just completed the second trimester at the end of August, and it was the second-most profitable trimester in the history of the firm. We share a significant amount, about 40 percent of our operating income, as variable compensation, either profit sharing or bonuses, primarily with brokers but also with home office and branch staff.

The more profitable we are and the greater results that we have, the greater that variable compensation piece is. It’s been a very good year.

Our revenues are up 22 percent [from $3.1 billion in 2006], and our profitability is up about 55 percent. We had net income last year of about $350 million, and we’re running about 50 percent ahead of that.

Q. Are you making any changes to the branch network?As we grow and add 600 advisors, that means adding 600 new branches, each with a full-time firm-paid branch office administrator, BOA, or account specialist. Finding that real estate is a constant challenge and is a big part of the expansion effort, since we want to have a good presence in every market we’re in.

In some markets, we are having to get more creative than in the past. When you have up to 100 locations in a market, you have to add them very carefully. We typically have 1,000-1,500 square feet in a very visible, easily accessible first-floor location with off-street parking. These are common sense variables, but look at who we serve: Many of our clients are older and don’t like stairs or parking. We want to have convenient, welcoming, professionally focused locations.

We are also taking a look at how we equip our offices – everything from the furniture to how we decorate the branch, how it communicates what we do and supports the brand.

Q. What are you doing to enhance the customer experience? We just focus on understanding the needs of the individual investor and meeting these needs at convenient locations and through personally delivered service. That is our strategic advantage and the business model of Edward Jones.

The new communications platform we’ve rolled out over the past year and a half has enabled us to be faster and reliable with a lot more horse power. Part of what we are delivering already through the network is a complete suite of financial-assessment tools, which some might call financial-planning tools or software. They allow us to do an even better job for our clients by understanding more of their needs and meeting more of their needs.

Attorneys, estate planners and others who can help are available through our home office, and we are adding more of them. That way, when our financial advisors have a need for specialized expertise in tax or estates, they will be immediately on call to talk with the client and the advisor via the branch. You’ve got to have that ability today.

Q. Why are your client-satisfaction results so high? We have only one profit center at our firm, which is very unusual in our industry. That center is our individual branch office and how we interact with the clientele. It’s deceptively simple, but really elegant in its focus. We just try to do it exceedingly well, and to date, it’s worked really well for us.

Competition has never been stronger, that’s for sure. We have a national marketing initiative – TV, print and other ads. We sponsor a lot of the evening news programs. But equally important is the presence of the advisor, or a number of advisors in a market.

In St. Louis, our home market, we have about 350 financial advisors and therefore 350 locations in the greater St. Louis metroplex. We also have the cumulative presence, with each broker doing business with hundreds of clients, and the focus on our service levels and excellence that J.D. Power and others have recognized.

We are systematically surveying our clientele to better understand how we are doing on a branch-by-branch basis. The people who say we are delighting them with our service are referring others to us, and that’s the most significant way to build our business. We are making the experience of each individual investor as good as it can possibly be. If it is, the referral that the satisfied client will bring to us is a wonderful opportunity to grow.

Q. Tell us how the firm uses surveys?This is a whole new initiative for us. We have been recognized as No. 1 in service three years in a row by J.D. Power & Associates in the U.S. and the last two years in Canada, when the survey was initiated there. That is certainly nice, but to maintain and improve service, we decided to talk directly to the client about meeting their expectations and exceeding them.

We did 350,000 surveys in the end of 2006 and early 2007 to get a baseline of the service level in each of our branches. We surveyed between 40 to 50 randomly selected clients in every single branch.

We tabulated the information from a several-minute phone interview, got the feedback and shared it with the branches. We are recognizing our advisors and branch administrators for the excellent service.

We just had our first annual managing partners conference for our administrators with 320 people from three countries. We not only recognized them and celebrated them for having the highest level of service, but we asked them about what they are doing in order to capture the best practices and grasp what things they are doing that we can share to get other branches up to that level. That is a continuing training challenge and opportunity.

We have already completed 110,000 additional client surveys on service and we’re going to do this on a quarterly basis going forward. This way, we can update the branches on whether or not the service level is being maintained, improving or going down. We want to recognize changes quickly, in case we need to turn things around. It’s a big investment and a way to really understand on a branch-by-branch basis how we are meeting service. If we are going to compete on service, we have to make it as excellent as we can.

Q. What is your total client base?We sent out 6,038,000 customer account statements at the end of September.

Q. Do you have other plans in the works? We are creating a five-year plan to identify our strategic strengths, advantages and ways to move forward. But with competition heating up and the [market] demographics being as attractive as they are, we decided to take it out to a five-year plan. This effort is being led by Tim Kirley, who previously served as our U.K. county leader.

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Janet Levaux is the managing editor of Research; reach her at jlevaux@researchmag.com.

Janet Levaux

Janet Levaux, MA/MBA, is Editor in Chief of Investment Advisor magazine; she has covered the financial markets since 1991 and advisors since 2005. After living in Latin America and Europe as part of her studies at Yale and Johns Hopkins SAIS, Janet worked in Japan and then California, where she raised two children and earned a business degree before returning to her hometown of San Antonio, Texas.

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